The month of August is known for weak stock market returns. Last week only reinforced this idea. All of the major U.S. indices posted declines. Continued weakness in crude oil pressured energy stocks lower. We saw more evidence of traders selling their winners this year and that knocked the biotech stocks down with a -4.7% loss. Of course a few high-profile earnings misses in the biotech group didn't help matters.

Money was looking for safety and found its way into the bond market, which pushed the yield on the 10-year bond down to 2.18%. It was the fourth weekly decline in a row for bond yields.

The Dow Jones Industrial Average was making headlines on Friday for its seventh down day in a row. That's the longest losing streak since 2011. The S&P 500 has not fared much better with declines in five out of the last six sessions. Nearly all of the market's sectors posted declines.

Commodities continued to sink. The CRB commodity index has broken down below its 2009 bear-market lows. This is starting to generate fears of global deflation. Precious metals almost bucked the down trend with silver posting a very minor gain. Gold didn't quite close positive for the week and thus marked its seventh weekly decline in a row. This is the longest losing streak for gold since 1999. Energy stocks had a rough week with crude oil falling -6.5%. A barrel of oil is down to $43.75. It was the sixth weekly loss in a row for oil. Dollar strength pushes commodities lower and right now the U.S. dollar looks like it's coiling for another bullish breakout higher.

Chart of the CRB commodity index

Chart of Crude Oil

Chart of the Gold ETF (GLD)

Chart of the U.S. dollar

Economic Data

It was a busy week for economic data. Construction spending for May was revised higher from +0.8% to +1.8%. June's construction spending only rose +0.1%. The ISM manufacturing index declined from 53.5 in June to 52.7 in July. This missed estimates for a rise to 53.7. The ISM non-manufacturing (services) index improved from 56.0 in June to 60.3 in July. July's ISM non-manufacturing number marked the 66th consecutive month of growth (readings above 50.0) and marked the highest reading since August 2005.

The ADP National Employment Report said private businesses added +185,000 jobs in July. Their June report was adjusted lower from +237K to +229K. This may have generated some worry over the government's nonfarm payroll report on Friday.

Depending on who you asked economists were estimating July job growth in the 215K-220K-225K range. The official number came in at +215,000. June's job report was adjusted from +223K to +231K while May's was adjusted higher from +254K to +260K. The average jobs report is now above 200,000, which is what the Federal Reserve wanted to see. The three-month average is even higher at +235K. It was the impact this jobs report might have on the Fed's decision that fueled market weakness. The July number was considered good enough for the Fed to raise rates in September.

Markets continue to ignore the terrible participation rates. There is a record 93,770,000 Americans not in the workforce. The Labor force participation rate fell back to a 38-year low at 62.6%. The headline unemployment rate was unchanged at 5.3%, a seven-year low.

Joe LaVorgna, chief U.S. economist at Deutsche Bank, said, "If the labor market continues to generate 200K+ jobs per month, the unemployment rate will break 5% by yearend." Joe was quoted on the Wall Street Journal's website on Friday. He went on to say the continued strength in the job market is probably the main reason the Federal Reserve wants to raise rates this year.

The Fed Funds Futures rate is showing a 60% chance of a 25 basis point rate hike in September. Citigroup analyst Steven Englandar believes it is closer to a 75% chance of a September hike. Not everyone agrees. The fact that inflation is so low is seen as a deterrent to the Fed raising rates. There are also conflicting opinions on if the Fed will raise just once in September with a "one and done" attitude or if it will be the beginning of a multi-hike trend over the next six to nine months.

Overseas Economic Data

There was plenty of economic data overseas including some central bank news. The Bank of England left its monetary policy unchanged. England is keeping its main interest rate at 0.5% and leaving its asset buying program at 375 billion pounds. There seems to be a growing camp of policy makers who believe that England is nearing its first rate hike, likely in 2016.

The Reserve Bank of Australia left its rates unchanged at 2.0%. India's central bank also left their rates unchanged, currently at 7.25%. The Bank of Japan left their policy unchanged with their main interest rate at 0.1%. There were no changes to their massive QE program of 80 trillion yen (about $640 billion). A recent Wall Street Journal survey revealed that most economists expect Japan's GDP to fall -2% last quarter.

Germany said their factory orders in June were up +2.0%, which was higher than expected. The country's industrial production in June fell -1.4% for the month. Germany's manufacturing PMI for July improved from 51.5 to 51.8. France reported their industrial production for June slipped -0.1%, which was worse than expected. French manufacturing PMI was unchanged at 49.6 in July. That's in negative territory. Spain's industrial production for June surged +4.5%, up from +3.4%.

The Eurozone services PMI for July inched higher from 53.8 to 54.0. Numbers above 50.0 are positive. Retail sales in June slipped -0.6% for the month, which was worse than expected. The Eurozone's manufacturing PMI for July improved slightly from 52.2 to 52.4.

Negotiations with Greece continue. Leaders on both sides of the table believe that a deal will be done before Greece has to make a 3.4 billion euro payment to the European Central Bank on August 20th. Meanwhile the Greek stock market reopened after being shut down for five weeks. Monday, August 3rd, was the first day of trading and the Greek market crashed -17%. Greek banks have been crushed with heavy selling the last few days.

Looking East we saw Japan report its manufacturing PMI for July inched lower from 51.4 to 51.2. China's official manufacturing PMI slipped to a five-month low with a drop to 50.0. Their non-manufacturing PMI moved the opposite direction with a rise from 53.8 to 53.9, which is a five-month high. The Chinese Caixin manufacturing PMI reading for July fell from 48.2 down to 47.8. Numbers above 50.0 suggest growth and the manufacturing number is moving the wrong way. The country's economic slowdown is starting to have a bigger impact on businesses around the globe. China is also a big reason commodities are falling because the country's demand is slowing down.

There remains a lot of focus on the Chinese stock market. It was another volatile week for Chinese stocks. A recent news article suggested that one third of all Chinese investors have closed their trading accounts since the market's crash in the last couple of months. The Shanghai index managed a bounce on Friday after the government said they had increased the amount of money to support the stock market up to 1 trillion yuan.




Major Indices:

The large cap S&P 500 index fell -1.25% for the week . That reduces the 2015 year to date gain down to +0.9%. The index pierced what should be technical support at its 200-dma on Friday before paring its losses. In spite of all the volatility, the S&P 500 remains inside its five-month 2,040-2,135 trading range. Unfortunately this is bad news for the long-term up trend, which has seen momentum come to a standstill (see long-term chart below).

Until we see the S&P 500 break out one way or the other from its trading range it's going to be tough picking a stock market direction. On a short-term basis the market looks weak. We could see the S&P 500 fall toward support at the bottom of the range near 2,040.

chart of the S&P 500 index:

Long-term chart of the S&P 500 index:

The NASDAQ composite was hammered on Thursday, which produced most of last week's -1.65% decline. The index managed to trim its losses on Friday but like the S&P 500 the NASDAQ is down five out of the last six days. We could look for support near the 5,000 mark but I'd focus on the 4,900 level, which is probably stronger support and it's bolstered by the simple 200-dma. Year to date the NASDAQ is up +6.1%.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index underperformed its big cap rivals with a -2.57% decline last week. This index hit new five-month lows on Friday before paring its losses. We should keep an eye on support near 1,200. A breakdown below 1,200 could be a very bearish signal for the broader market. Year to date the $RUT is only up +0.2%.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

After last week's rush of data the week ahead looks quiet. We'll get the U.S. PPI on Friday, which provides a glance at inflation on a wholesale level. Friday also brings the latest Eurozone GDP estimate.

- Monday, August 10 -
...nothing significant...

- Tuesday, August 11 -
Wholesale inventory data

- Wednesday, August 12 -
China's retail sales
China industrial production

- Thursday, August 13 -
U.S. retail sales data
Business inventory data
Eurozone CPI

- Friday, August 14 -
Eurozone GDP estimate
Producer Price Index (PPI), wholesale inflation
Industrial Production
University of Michigan Consumer Sentiment survey

Additional dates to be aware of:

Sept. 7th - Markets closed for Labor Day holiday
Sept. 17th - FOMC meeting, policy update, economic forecasts
Sept. 17th - Fed Chairman Yellen press conference

Looking Ahead:

Looking ahead we are going to hear more about the commodity breakdown. Plunging commodity prices suggest slowing inflation at best and deflation at worst. Bill Gross, who used to run PIMCO, believes that the world is "dangerously close to deflationary growth".

While we are on the topic of slow growth the Atlanta Fed updated their forecast for U.S. Q3 GDP growth. These guys have been dead on with their Q1 and Q2 estimates. Right now they are expecting Q3 GDP growth of just +1%. That's down from +2.3% in the second quarter. Meanwhile Wall Street economists are expecting +3.2% Q3 growth, which seems awfully optimistic.

Optimism is one thing investors are severely lacking right now. The weekly AAII investor sentiment survey did see bullish sentiment improve +3.2% midweek but it's only at 24.3%. That's the 19th week in a row bullish sentiment has been below the long-term average of 38%. Bearish sentiment fell -9% to 31.7% while neutral sentiment rose 5.8% to 44.0%, which is extremely high. The long-term average for neutral sentiment is 30.9%. This survey took place before Thursday's drop and before Friday's payroll number. We could see bearish sentiment rise in next week's survey.

All week long investors were looking ahead to Friday's job report. July's jobs number above 200,000 was considered good enough for the Fed to go ahead and raise rates in September. This sparked selling pressure across the market on Friday morning. Naturally one might wonder if we are poised for another taper tantrum. The last time investors were worried the Fed might raise rates too soon the stock market saw a painful pullback.

There are plenty of arguments on both sides to raise or not raise rates. Several months of +200,000 job growth is one reason to raise rates. Yet +1% Q3 GDP growth seems like a reason to wait. Plus we have both the International Monetary Fund (IMF) and the World Bank asking the Federal Reserve to postpone any rate hikes until next year to prevent hurting an already weak global economy. The Fed is worried that the U.S. is due for a recession and they don't have any bullets left in their gun. They want to raise rates (reload the gun) so they have some ammunition ready for the next recession.

You already know that August and September tend to be weak months for stock market performance. Volume also tends to go down in August as stock market participants cram in their last bit of summer vacation before school starts for their children. I suspect that investors could choose to step away from the stock market and just sit on the sidelines and wait until the September FOMC meeting. The market's breadth has not improved either, which is just one more reason to be cautious.

~ James